• Banking fears persist despite contingency plans
• Yen gains as equities and bond yields slide
• Fed is seen pausing and initiating rate cuts
• Gold skyrockets above $2,000, oil falls to 15-month low

The US dollar underperformed against all the other major currencies on Friday, with the safe-haven yen taking the most advantage of its weakness. Although the dollar rebounded somewhat today, it remains on the back foot against its Japanese peer.

Despite the emergency funding to US banks by the Fed, the SNB’s loan to Credit Suisse, and the lifeline for First Republic, banking shares extended their tumble, suggesting that markets remained worried about contagion and concerned that a recession may be more likely than previously thought due to the impact of higher interest rates on the global economy.

Over the weekend, UBS said it will buy Credit Suisse for 3bn francs, and soon after the announcement, the Fed, the ECB and other major central banks issued reassuring statements that they will take action to enhance market liquidity.

Yet, markets remained unimpressed as Credit Suisse said that 16bn francs of its Tier 1 debt will be written down to zero, leaving some bondholders with nothing at all. Indeed, the yen continued to attract safe haven flows today, Asian markets closed in the red, Europe opened wounded, and US futures are pointing to a lower open.

Investors’ fears regarding the banking sector are also reflected in the pricing regarding the future course of action by major central banks. Following last week’s ECB gathering, where officials decided to hike by 50bps, but abandoned the guidance saying that more hikes are needed, investors are now assigning a nearly 75% probability that the ECB will hold its fire when it next meets.

As for the Fed, there is a 70% probability for no action, with the remaining 30% pointing to another quarter-point increase. More importantly, market participants anticipate a series of rate reductions over the next 8 months, expecting interest rates to end the year at 3.6%.

The Committee decides on interest rates on Wednesday and with all that chaos, traders may be biting their nails in anticipation of the outcome. Despite slowing notably since the summer, US inflation is still running at three times the Fed’s 2% objective and thus, it may be hard to envision a scenario where policymakers match investors’ implied rate path. Therefore, the risks surrounding Wednesday’s decision may be tilted to the upside. A less dovish than expected outcome could help the wounded dollar, but it could add extra pressure on equities.

With investors seeking shelter in safe havens, the US dollar sliding, and bond yields around the globe coming under renewed pressure, gold enjoyed another round of robust gains on Friday, extending its rally today and breaking above the psychological round number of $2,000. The next stop for the precious metal may be the peak of March 8, at $2,070.

The banking turmoil affected oil prices as well, with WTI falling to its lowest in 15 months on Monday as investors became increasingly worried that a crisis in the global banking sectors could trigger a severe recession that would further hurt demand for energy. Another hike by the Fed on Wednesday could intensify those fears and perhaps push WTI down to the lows of December 2021, at around $62.00.